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THEORIES OF COST ALLOCATION

Bachelor of Science in Accountancy

Aspects of the Ability to Pay Theory:

Introduction THE THEORY OF 1. Vertical equity – proposes that the extent of one’s ability to pay is
directly proportional to the level of his tax base (gross concept)

TAXATION
to Taxation The government’s necessity for funding is the theory of taxation.
2. Horizontal equity – requires consideration of the particular
circumstances of the taxpayer (net concept)

THE LIFEBLOOD DOCTRINE

THE BASIS OF TAXATION
Implications of the lifeblood doctrine in taxation:
Public Services
1. Tax is imposed even in the absence of a Constitutional grant.
2. Claims for tax exemption are construed against taxpayers.

WHAT IS 3.
4.
5.
The government reserves the right to choose the objects of taxation.
The courts are not allowed to interfere with the collection of taxes.
In income taxation:

TAXATION?
a. Income received in advance is taxable upon receipt.
b. Deduction for capital expenditures and prepayments is not allowed as it
Government People effectively defers the collection of income tax.
c. A lower amount of deduction is preferred when a claimable expense is subject to
Taxes
limit.
d. A higher tax base is preferred when the tax object has multiple tax bases.

While most public services are received indirectly, their realization by every citizen and
resident is undeniable. In taxation, the receipt of these benefits by people is
conclusively presumed.

THEORIES OF COST ALLOCATION

Taxation may be defined as a State power, a legislative
process, and a mode of government cost distribution. 1. Benefit received theory
The benefit received theory presupposes that the more benefit one receives
from the government, the more taxes he should pay.
As a state power As a process As a mode of cost
distribution
W HAT ARE THE
I NHER E NT P OW ERS OF
Taxation is an inherent power of the state to Taxation is a process of levying taxes by the
enforce a proportional contribution from its
subjects for public purpose
legislature of the State to enforce proportional
contributions from its subjects for public
Taxation is a mode by which the State
allocates its costs or burden to its subjects
2. Ability to pay theory
purpose who are benefited by its spending
The ability to pay theory presupposes that taxation should also consider the
taxpayer’s ability to pay. Taxpayers should be required to contribute based
on their relative capacity to sacrifice for the support of the government.
THE STATE?

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INHERENT POWERS OF THE STATE [PET]

1. Taxation Power
Taxation power is the power of the State to enforce proportional contribution from its
subject to sustain itself.
I NHER E NT
THE LIMI TA TI ONS O F
2. Police Power LIM ITATIONS OF
Police power is the general power of the State to enact laws to protect the well-being THE TAX ATI ON POW ER
of the people.
TAXATIO N POW E R
3. Eminent Domain
Eminent domain is the power of the State to take private property for public use after
paying just compensation.

INHERENT POWERS OF THE STATE DIFFERENCE LIMITATIONS OF THE TAXATION POWER INHERENT LIMITATIONS OF TAXATION

A. Inherent Limitations [TIPEN] 1. Territoriality of taxation

POINT OF DIFFERENCE TAXATION POLICE POWER EMINENT DOMAIN
EXERCISING AUTHORITY GOVERNMENT GOVERNMENT GOVERNMENT OR PRIVATE ENTITIES
1. Territoriality of taxation The government can only demand tax obligations upon its subjects or residents within
NECESSITY OF DELEGATION DELEGATION NOT NECESSARY THERE MUST BE DELEGATION THERE MUST BE DELEGATION 2. International comity its territorial jurisdiction.
PURPOSE REVENUE AND SUPPORT OF THE PROTECTION OF WELL-BEING OF THE PROPERTY IS TAKEN FOR PUBLIC USE 3. Public purpose
GOVERNMENT PEOPLE 4. Exemption of the government Two-fold obligations of taxpayers:
PERSONS AFFECTED COMMUNITY/CLASS OF INDIVIDUALS COMMUNITY/CLASS OF INDIVIDUALS OWNER OF THE PROPERTY
5. Non-delegation of the taxing power a. Filing of returns and payment of taxes
EFFECT OF TRANSFER OF PROPERTY MONEY BECOMES PART OF THE PUBLIC NO TRANSFER OF TITLE; AT MOST THERE IS THERE IS TRANSFER OF RIGHT TO
RIGHTS FUNDS RESTRAINT ON THE INJURIOUS USE OF THE PROPERTY WHETHER IT BE OF OWNERSHIP b. Withholding of taxes on expenses and its remittance to the government
AMOUNT OF IMPOSITION UNLIMITED
PROPERTY
SUFFICIENT TO COVER THE COSTS OF
OR LESSER RIGHT
NO IMPOSITION, THE OWNER IS PAID THE
B. Constitutional Limitations
REGULATION FMV OF HIS PROPERTY 1. Due process of law These obligations can only be demanded and enforced by the Philippine government
IMPORTANCE MOST IMPORTANT OF THE THREE MOST SUPERIOR 2. Equal protection of the law upon its citizens and residents.
RELATIONSHIP WITH THE CONSTITUTION INFERIOR TO THE “NON-IMPAIRMENT
CLAUSE”
SUPERIOR TO THE “NON-IMPAIRMENT
CLAUSE”
SUPERIOR AND MAY OVERRIDE THE “NON-
IMPAIRMENT CLAUSE” BECAUSE THE
3. Uniformity rule in taxation
WELFARE OF THE STATE IS SUPERIOR TO 4. Progressive system of taxation
PRIVATE CONTACTS
5. Non-imprisonment for non-payment of debt or poll tax
LIMITATION CONSTITUIONALLY AND INHERENTY PUBLIC INTEREST AND THE REQUIREMENT PUBLIC PURPOSE AND JUST
LIMITED OF DUE PROCESS COMPENSATION 6. Non-impairment of obligation and contract
7. Free worship rule
8. Exemption of religious or charitable entities, non-profit cemeteries, churches and
mosque from property taxes

INHERENT POWERS OF THE STATE LIMITATIONS OF THE TAXATION POWER INHERENT LIMITATIONS OF TAXATION

Similarities of the three powers of the State: B. Constitutional Limitations 1. Territoriality of taxation
1. They are all necessary attributes of sovereignty 9. Non-appropriation of public funds or property for the benefit of any church, sect or Exceptions to the territoriality principle:
2. They are all inherent to the State system of religion
3. They are all legislative in nature 10. Exemption from taxes of the revenues and assets of non-profit, non-stock a. In income taxation, resident citizens and domestic corporations are taxable on
4. They are all ways in which the State interferes with private rights and properties educational institutions income derived both within and outside the Philippines.
5. They all exist independently of the Constitution and are exercisable by the 11. Concurrence of a majority of all members of Congress for the passage of a law b. In transfer taxation, residents or citizens such as resident citizens, non-resident
government even without a Constitutional grant. However, the Constitution may granting tax exemption citizens and resident aliens are taxable on transfers of properties located within or
impose conditions or limits for their exercise 12. Non-diversification of tax collections outside the Philippines.
6. They all presuppose an equivalent form of compensation received by the persons 13. Non-delegation of the power of taxation
affected by the exercise of the power 14. Non-impairment of the jurisdiction of the Supreme Court to review tax cases
7. The exercise of these powers by the local government units may be limited by the 15. The requirement that appropriations, revenue, or tariff bills shall originate exclusively
national legislature in the House of Representatives
16. The delegation of taxing power to local government units

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INHERENT LIMITATIONS OF TAXATION INHERENT LIMITATIONS OF TAXATION CONSTITUTIONAL LIMITATIONS OF TAXATION

2. International comity 5. Non-delegation of the taxing power 2. Equal protection of the law
No country is powerful than the other. It is by this principle that each country observes The legislative taxing power is vested exclusively in Congress and is non-delegable, Taxpayers should be treated equally both in terms of rights conferred and obligations
international comity or mutual courtesy or reciprocity between them. pursuant to the doctrine of separation of the branches of the government to ensure a imposed.
system of checks and balances.
Hence, This rule applies where taxpayers are under the same circumstances and conditions.
1. Governments do not tax the income and properties of other governments Exceptions to the rule of non-delegation
2. Governments give primacy to their treaty obligations over their own domestic laws 1. Under the Constitution, local government units are allowed to exercise the power to
tax to enable them to exercise their fiscal autonomy.
Embassies or consular offices of foreign governments in the Philippines including 2. Under the Tariff and Customs Code, the President is empowered to fix the amount of
international organizations and their non-Filipino staff are not subject to income tax or tariffs to be flexible to trade conditions
property taxes. Under the National Internal Revenue Code (NIRC), the income of foreign 3. Other cases that require expedient and effective administration and
government and foreign government-owned and controlled corporations are not implementation of assessment and collection of taxes
subject to income tax.

INHERENT LIMITATIONS OF TAXATION CONSTITUTIONAL LIMITATIONS OF TAXATION

3. Public Purpose 3. Uniformity rule in taxation

Tax is intended for the common good. Taxation must be exercised absolutely for public The rule of taxation shall be uniform and equitable. Taxpayers under dissimilar
purpose. It cannot be exercised to further any private interest. circumstances should not be taxed the same.
C ONS TI TU TI ONAL
LI MI TAT IO NS O F
TAXA TI ON PO WE R

INHERENT LIMITATIONS OF TAXATION CONSTITUTIONAL LIMITATIONS OF TAXATION CONSTITUTIONAL LIMITATIONS OF TAXATION

4. Exemption of the government 1. Observance of due process of law 4. Progressive system of taxation
The government normally does not tax itself as this will not raise additional funds but Under the NIRC, assessments shall be made within three years from the due date of Under the progressive system, tax rates increase as the tax base increases. The
will only impute additional costs. filing of the return or from the date of actual filing, whichever is later. Collection shall be progressive system aids in an equitable distribution of wealth to society by taxing the
made within five years from the date of assessment. The failure of the government to rich more than the poor.
Under the NIRC, government properties and income from essential public functions are observe these rules violates the requirement of due process.
not subject to taxation. However, the income of the government from its properties and
activities conducted for profit, including income from government-owned and
controlled corporations is subject to tax.

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CONSTITUTIONAL LIMITATIONS OF TAXATION CONSTITUTIONAL LIMITATIONS OF TAXATION CONSTITUTIONAL LIMITATIONS OF TAXATION

5. Non-imprisonment for non-payment of debt or 8. Exemption of religious, charitable or educational 11. Concurrence of a majority of all members of
poll tax entities, non-profit cemeteries, churches and Congress for the passage of a law granting tax
mosques, lands, buildings, and improvements from exemption
Basic Community Tax
property taxes
The Constitution requires the vote of the majority of all members of Congress in the
Non-imprisonment grant of tax exemption.
The Constitutional exemption from property tax applies for properties actually, directly,
Additional Community Tax and exclusively used for charitable, religious, and educational purposes. However, in the withdrawal of tax exemption, only a relative majority is required.
Non-payment is an act of tax evasion
and is punishable by imprisonment

CONSTITUTIONAL LIMITATIONS OF TAXATION CONSTITUTIONAL LIMITATIONS OF TAXATION CONSTITUTIONAL LIMITATIONS OF TAXATION

6. Non-impairment of obligation and contract 9. Non-appropriation of public funds or property for 12. Non-diversification of tax collections
Government should not set aside its obligations from contracts by the exercise of its the benefit of any church, sect, or system of
Tax collections should be used only for public purpose. It should never be diversified or
taxation power. Tax exemptions granted under contract should be honored and should religion
not be cancelled by unilateral government action. used for private purpose.

This constitutional limitation is intended to highlight the separation of religion and the
State. To support freedom of religion, the government should not favor any particular
system of religion by appropriating public funds or property in support thereof.

CONSTITUTIONAL LIMITATIONS OF TAXATION CONSTITUTIONAL LIMITATIONS OF TAXATION CONSTITUTIONAL LIMITATIONS OF TAXATION

7. Free worship rule 10. Exemption from taxes of the revenues and assets 13. Non-delegation of the power of taxation
The Philippine government adopts free exercise of religion and does not subject its of non-profit, non-stock educational institutions Taxation power as part of lawmaking is vested exclusively in Congress.
exercise to taxation. Consequently, the properties and revenues of religious institutions
such as tithes or offerings are not subject to tax.
including grants, endowments, donations, or
contributions for educational purposes However, delegation may be made on matters involving the expedient and effective
This exemption, however, does not extend to income from properties or activities of administration and implementation of assessment and collection of taxes. Also,
certain aspects of the taxing process that are non-legislative in character are
religious institutions that are proprietary or commercial in nature. The Constitution recognizes the necessity of education in state building by granting tax
delegated.
exemption on revenues and assets of non-profit educational institutions. This
exemption, however, applies only on revenues and assets that are actually, directly,
and exclusively devoted for educational purposes

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CONSTITUTIONAL LIMITATIONS OF TAXATION STAGES OF THE EXERCISE OF TAXATION POWER

14. Non-impairment of the jurisdiction of the 2. Ass essment and Collection

Supreme Court to review tax cases
The tax law is implemented by the administrative branch of the government.
Notwithstanding the existence of the Court of Tax Appeals, which is a special court, all
cases involving taxes can be raised to and be finally decided by the Supreme Court of
STAGE S OF T HE Implementation involves assessment or the determination of the tax liabilities of
taxpayers and collection. This stage is referred to as incidence of taxation or the
the Philippines
E XERC ISE O F TA XATION administrative act of taxation.

POW ER
(1) Levy or imposition and (2) Assessment and collection

CONSTITUTIONAL LIMITATIONS OF TAXATION STAGES OF THE EXERCISE OF TAXATION POWER

15. Appropriations, revenue, or tariff bills s hall 1. Levy or imposition

originate exclusively in the House of
This process involves the enactment of a tax law by Congress and is called impact of
Representatives, but the Senate may propose or taxation. It is also referred to as the legislative act in taxation. SITUS OF TAXATION
concur with amendments
As mandated by the Constitution, tax bills must originate from the House of Situs is the place of taxation. Situs rules serve as
Laws that add income to the national treasury and those that allows spending therein Representatives. frames of reference in gauging whether the tax
must originate from the House of Representatives while Senate may concur with object is within or outside the tax jurisdiction of the
amendments. taxing authority.

CONSTITUTIONAL LIMITATIONS OF TAXATION STAGES OF THE EXERCISE OF TAXATION POWER EXAMPLES OF SITUS RULES

16. Each local government unit shall exercise the 1. Levy or imposition 1. Business tax situs – bu sinesses are subject to tax in the
power to create its own sources of revenue and shall place where the business is conducted.
Matters of legislative discretion in the exercise of taxation:
have a just share in the national taxes 1. Determining the object of taxation [BITRAPPP]
Illustration: A taxpayer is in volved in car dealersh ip
2. Setting the tax rate or amount to be collected
This is a constitutional recognition of the local autonomy of local governments and an 3. Determining the purpose for the levy which must be for public use abroad and restaurant operation in the Philippines
express delegation of the taxing power. 4. Kind of tax to be imposed
5. Apportionment of the tax between the national and local government
6. Situs of taxation
7. Method of collection 2. Income tax situs on services – serv ice fe es are subject
to tax w here they are rendered

Illustration: A foreign corporation leases a residential

space to a non-resident Filipino citizen abroad

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EXAMPLES OF SITUS RULES OTHER FUNDAMENTAL DOCTRINES IN TAXATION OTHER FUNDAMENTAL DOCTRINES IN TAXATION

3. Income tax situs on sale of goods – the gain on sale is 1. Marshall Doctrine 6. Im pre scriptibility in taxation
subject to tax in the place of sale “The power to tax involves the power to destroy. ” The government’s right to collect taxes does n ot prescribe
unless the law itself provides for such prescription.
Illustration: W hile in China, a non-resident OFW citizen Taxation can be used to discourage or pro hibit undesirable
agreed with a Chinese friend to sell his diamond activities o r occupation. Un der the NIRC, tax prescribes if not co llected within 5
necklace to the latter. Th ey stipulated that t he delivery years from the date of its assessment.
of the it em and th e payment will be made a week later 2. Holm e’s Doctrine
in the Philippines. The sale was consummated as In the absence of an assessment, tax prescribes if not
“Taxation power is not the power to destroy while the collected by judicial act ion within 3 years from the date
agreed.
court sits.” the return is required to be filed.
Taxation power may be used to build or encourage Taxes due from taxpayers who did not file a return or those
beneficial activities or industries by the grant of tax who filed fraudulent returns do not prescribe .
incentives.

EXAMPLES OF SITUS RULES OTHER FUNDAMENTAL DOCTRINES IN TAXATION OTHER FUNDAMENTAL DOCTRINES IN TAXATION

4. Property tax situs - Properties are taxable in t heir 3. Prospectivity of tax laws 7. Doctrine of estoppel
location. Tax laws are generally prospective in operation. An ex post The government is not subject to esto ppel. The e rror of any
facto law or a law th at retro acts is prohibited by t he government employee does not bind the government. It is
Illustration: An overseas Filipino worker has a Constitution . held that the neglect or omission of gove rn ment officials
residential lot in the Philippines. entrusted with the collection of taxes sh ould not be
4. Non-com pensation or set-off allowed to bring harm or detriment to t he interest of th e
5. Personal tax situs - Persons are taxable in their place of Taxes are not subject to automatic set-off or people. Also, erroneous applications of the law by public
residence or dom icile of taxpayer. compen sation. The taxpayer cannot delay pay ment o f tax officers do not block th e subsequent correct application o f
to w ait for the resolution of a lawsuit involving his pending the same.
Illustration: Ahmed Loft i is a Su danese st udying claim against the go vernment.
medicine in th e Philippines

OTHER FUNDAMENTAL DOCTRINES IN TAXATION OTHER FUNDAMENTAL DOCTRINES IN TAXATION

5. Non-assignment of taxes 8. Judicial Non-interfe re nce

Tax obligation s cannot be assigned or transferred to Generally, courts are not allowed to issue injunctio n
another entity by con tract. Cont racts executed by the against the government’s pursuit to collect tax as th is
OT HER FU NDAMENTA L taxpayer to such effect shall not prejudice the right of the would unnecessarily defer tax collection .
government to collect.
DO CTR INE S IN
T AXAT IO N

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OTHER FUNDAMENTAL DOCTRINES IN TAXATION TYPES OF DOUBLE TAXATION REMEDIES TO DOUBLE TAXATION [CERT]

9. S trict Construction of Tax Laws 1. Direct Double Taxation

When th e law clearly provides for taxation, taxation is the This occurs when all the elemen ts of double taxation exists • ALLOWANCE FOR TAX CRE DIT
gen eral ru le unless there is a clear exemption. for bo th impositions. • PROVISION FOR TAX EXE MPTION
• ALLOWANCE FOR PRINCIPLE OF RE CIPROCITY
• Vague tax law Examples: • ENTER INTO TREATIES OR AG REEMENTS WITH FOREIGN
Vague tax laws are construed against the government an d a. An income tax of 10% on monthly sales and a 2% income GOVERNMENTS
in favor of t he taxpayers. A vague tax law means no tax tax on the annual sales (tot al of month ly sales)
law.
b. A 5% t ax on bank reserve deficiency and anoth er 1%
• Vague exemption laws penalty per day as a consequence of such reserve
Vague exemption laws are construed against the taxpayer deficiency
and in favor of the government. A vague tax exemption law
means no exempt ion law.

TYPES OF DOUBLE TAXATION

2. Indirect Double Taxation

This occurs when at least one of t he secondary elements
of double taxation is not common for both impositions.
E SC APES F RO M
DOU BLE T AXAT ION Ex a m p l e s :
a. Th e n a t i o n al go v e r nm e nt le v ie s bu s i ne s s ta x on t he s a l e s o r gr o s s TAXA TI ON
Double taxation occurs when the same taxpayer is taxed re c e i pt s o f b us i n e s s w h il e t he lo ca l g o v e rn m e n t l e v i e s b u s in e s s t ax
up o n the s a m e s a l e s o r re c e ip t s Escapes from taxation are the means available to the
twice by the same jurisdiction for the same thing.
taxpayer to limit or even avoid the impact of taxation.
b. Th e n a t i o n al go v e r nm e nt co l le c t s in co m e t a x f r om a t a x pa ye r o n hi s
in c o m e w h il e t he go v e r nm e nt co l le c t s co m m un i ty t ax u p on t he s a m e
in c o m e

c. Th e P h il i pp i ne g ov e r n m e nt t a x e s f o re i g n in c om e o f d om e s t i c
co r po ra t i o ns an d re s i d e nt c it iz e n s w h i le a f o re i gn g o v e rn m e n t al s o
t a xe s t h e s a me in co m e .

ELEMENTS OF DOUBLE TAXATION ESCAPES FROM TAXATION

1. Primary elem ent: Same object A. Those that re sult to loss of government revenue
2. Secondary elem ents:
1 . T a x Ev a s i o n , a l s o k no w n a s ta x d o d g in g , r e f e rs to a ny a ct of t r i ck
a. Same type of tax t h a t t e n d s to i l le g a ll y re d u ce or a v o id t h e pa y m e nt of ta x
b. Same purpose of tax
c. Same taxing jurisdiction REM E DI ES T O 2 . T a x a v oi d a n ce , al s o k no w n a s t a x mi n im i z at io n, r e f e rs t o a ny ac t or
t r i ck t ha t re d uc e s o r t o ta ll y e s ca p e s t a x e s b y a n y l e g a ll y pe r mi s s i bl e
d. Same tax period
DOU BLE TA XATI ON m e an s

3 . T a x e x e m p ti o n, a ls o k n o w n a s t ax h o li d ay , r e f e r s t o t h e i m m u n i t y,
p ri v i l e ge or f r e e d o m f r o m b e in g s u bj e c t t o a t a x w hi c h ot h e r s a re
s u bj e c t t o.

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ESCAPES FROM TAXATION

B. T hose that do not result t o loss of gove rnme nt re venue

1. Sh i f t i n g – th i s i s th e p ro c e s s o f t r a ns f e r ri n g t a x b ur de n t o ot h e r
t a xp a ye rs

THANK YOU!
2. C a p i ta l i z at i o n – th is p e rt a i ns t o t h e a d ju s t m e nt of th e v a l ue of an
as s e t c au s e d b y c h an g e s i n t a x ra t e s .

3. T r a ns fo r m at i o n – th i s p e rt ai n s t o t h e e l i m i n a t i o n o f w as t e s o r lo s s e s
by t h e t a x p ay e r t o f or m s a v in g s t o c om p e ns a te f or t h e t ax i m po s i ti on
or i nc r e as e in t ax e s

TAX AMNE STY

VS
T AX CO NDO NATION

ESCAPES FROM TAXATION

Tax amnesty is a general pardon granted by the

go vernme nt for erring taxpayers to give them a chance to
reform and enable them to have a fresh start to be part of
a society with a clean slate.

Tax condonation is forgiveness of the tax obligation o f a

certain taxpayer under certain justifiable grounds. This is
also re ferred to as tax remission.